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Ripple: Will the new XRP 'clawback' feature boost the altcoin price?

09 Feb, 2024

The Ripple (XRP) community is rallying behind a proposal to introduce a "clawback" feature on the XRP Ledger (XRPL) by 8 February. With an overwhelming 94% approval from unique validators, this proposal aims to grant issuers more control over their distributed assets. The introduction of the clawback proposal on the XRPL blockchain has the potential to bolster XRP's attractiveness to institutional investors, although whether it will meet the price expectations of bullish traders remains to be seen.

How does XRP governance work?

If you are an XRP trader or investor, it pays to understand how the altcoin's ecosystem is governed and how upgrades are approved and introduced. XRP's main selling points are its speed and low resource cost for transactions, which allow for more scalable operations. To achieve this, the XRP blockchain does not use a proof-of-work consensus model for mining like Bitcoin (BTC). Instead, it uses a group of trusted validators to confirm transactions and maintain the network's integrity.

Validators in Ripple are chosen by Ripple Labs and other trusted entities, with Ripple Labs itself also being involved in the development of the blockchain. While the company has influence over the network, the XRP Ledger is designed to be decentralised. Ripple has gradually reduced its influence over time by adding more independent validators to the recommended list and encouraging the growth of a diverse validator ecosystem.

Changes to the XRP Ledger protocol, like the new clawback feature, are first proposed as amendments. These amendments are subject to a voting process among validators. If a supermajority of validators (at least 80%) agree to the amendment, it becomes active on the network.

Thus, clawback is certain to come to Ripple. But how will it change the blockchain and, more importantly, the price of XRP?

Understanding XRP's clawback feature

The clawback feature empowers issuers to reclaim funds from associated accounts under specific circumstances, such as lost access or fraudulent activities. This functionality ensures regulatory compliance and resolves legal disputes without disrupting the entire asset pool.

David Schwartz, Ripple's chief technology officer, has clarified that the clawback feature allows token issuers to retrieve specific quantities of tokens from current holders, thereby facilitating compliance with legal requirements. One of Ripple's key use cases is in cross-border transactions, in which the clawback feature will grant users the ability to react in real time to changing legislation in different countries, reversing select transactions without stopping operations entirely. Stablecoins issued on the XRP blockchain will also benefit from the additional security the new feature can offer.

Clawback is distinct from the existing "freeze" feature in XRPL, which cannot recover issued funds. The clawback feature offers a targeted approach, minimising disruptions and financial losses. It is worth noting that both these features affect issued tokens on the blockchain, not XRP, which is the blockchain's asset token.

This is a departure from one of the defining characteristics of cryptocurrency transactions. Typically, activity on the blockchain is irreversible. Once the cryptocurrency is in your wallet, no authority can remove it. While many crypto users like it this way, others will welcome such a change.

The crypto industry has seen several high-profile thefts and scams over the years, with victims having no recourse. In fact, Ripple co-founder Chris Larsen allegedly lost $112,000 worth of XRP in a theft in late January of this year.

With the upcoming clawback changes to Ripple, XRP users will have a new tool to deploy in case of bad actors. This extra level of security should please institutional investors, who need to weigh the risks of investing in Ripple compared to fiat currencies and more regulated assets.

Although it offers advantages in stability and risk management, reintroducing these kinds of traditional banking tools into a decentralised ledger like XRPL also raises concerns about user autonomy and complexity. Despite these concerns, the majority of XRPL validators have voted in favour of integrating the clawback feature.

Impact of clawback on XRP price

The introduction of the clawback feature could increase institutional trust and regulatory compliance, potentially boosting XRP's price, which is currently trading for around $0.50 per coin. However, concerns about centralisation and user autonomy may dampen market sentiment.

Historically, similar features in Ethereum (ETH) and Stellar (XLM) haven't hindered price performance significantly. Currently, XRP's price trajectory appears stagnant, with technical indicators suggesting potential resistance levels and bearish signals to monitor in the near future. The real value-add will be whether the clawback feature meaningfully increases investor interest. This could be sudden or gradual, and traders should watch XRP movements carefully following the introduction of clawback.

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